It looks like Bill Dodwell’s article in Tax Journal (subscription only – sorry) hasn’t gone down well with tax campaigners…

One thing I would say is that I think Bill Dodwell is right. Some sort of code of conduct might be appropriate for tax campaigners. I don’t suggest that there aren’t ultimately good intentions underlying the activities, just that some objective standards might be good.

This is the first suggestion by any professional that tax campaigners might look at their conduct and it has been met with what I consider to be a disproportionate response. Remember, this article was published in a professional magazine not splashed across the front pages of the newspapers like some stories in this debate. The offence taken seems to be rather over-the-top in my opinion.

It is not an unreasonable suggestion, especially when it’s such an easy thing to implement. Also, codes of conduct are often there to protect the person subscribing to it as much as anyone else.

For example, we currently have the Associate British Foods (ABF) story. Here’s my view of how the ABF story has played out:

If ABF are doing something wrong, then they are acquitting themselves well in the argument and Action Aid are devoting resources to defending themselves against claims of poor behaviour rather than raising awareness of the issues concerning developing countries. The minutiae of the argument are now being discussed and it is getting bogged down.

And it is an argument that Action Aid now need to win.

See Maya Forstater’s post which I think raises some serious questions. I see there is now a discussion going on with representatives from Action Aid on the blog so please read those for answers, corrections and clarifications.

Basically, if this is a prime case of tax avoidance in a developing country, it throws real doubt onto the even less clear-cut cases Action Aid might highlight in future and wastes Action Aid’s resources right now. The more resources invested into winning the argument, the more they need to win it.

My real problem with this story is the risk side. If ABF haven’t done anything wrong, Action Aid are damaging a business that is investing in Zambia.

Please note the “ifs” – I’m talking hypothetically. I’m just saying that from a risk point of view there appears to be little value gained in running the report.

Action Aid did a lot that was ethical here though, I must say. By corresponding with the company and providing a reasonable right of reply, they have allowed both sides of the story to come out. However, I have to question the ultimate decision to run with the report, and with the infographic I have seen which I think has some serious issues due to simplifying a complex situation.

As you can tell, I don’t think it has been to Action Aid’s benefit.

I think they need technical advice and some sort of technical sign off to help them decide when a story is reliable. This ought to be somebody who is suitably qualified and experienced, has sufficient PII cover and provides a technical report and risk assessment to accompany any press release or report. Ideally it should be independent but that normally costs money.

However, I’d be happy to give up a bit of free time to things like this and I’m sure other tax professionals would too. For example, Tolley and Christian Aid got some leading professionals to do an exercise in designing a tax system for a hypothetical developing country.

The sort of things suggested above form part of the professional code of conduct for the CIOT and it might have provided the sort of step back and objective analysis that may have been required here.

I might blog on some of the ethical considerations at a later point in time, but broadly I can’t see that subscribing to some objective standards is ever going to be a bad thing for anybody arguing in favour of ethical principles.

I think it’s fair to say however, that in any specific example of corporate tax avoidance there will always be detailed questions because information is not in the public domain (as the company in question refuses to disclose it, or it’s held in secrecy jurisdictions). A key focus of ActionAid’s campaign is to make more of this information accessible to either the public or revenue officials.

On the veracity of ActionAid’s research, I think the assessment of George Osborne is instructive:

“If you read this report, how many companies will you find involved in just selling your sugar to Burundi, which is just on the boundary of Zambia? Do you need all these companies in Mauritius, in Ireland to be involved? You see, by having all these intermediaries, they multinationals are just adding the costs and those costs go on the accounts of the Zambia Sugar company,

We are not saying this is illegal, we are not saying it doesn’t happen, but what we are questioning is that ‘does it need to happen?

No! You cannot have more cost on producing one tonne of sugar from Nakambala, with the factory in the fields and probably the furthest point to the sugar canes is only about 10km. The sugar is packed locally, why do they need somebody from Mauritius to say this is from Zambia? These are things that are happening but should we allow them to continue because they reducing the taxable income?” he asked.

Magande further said the management fees the firm pays for services sought out of Zambia could be avoided because there is capacity locally.

I was just writing you a reply on Maya Forstater’s blog! (I was going to ask if you had a copy of the Irish company accounts to email me at saunderstax@live.com)

I did read Martin’s blog at the time but I hadn’t read the report at that time. To be honest, it was the infographic that caught my attention and then when I read some of the report I personally felt it was misleading.

One of the key arguments that the company makes relates to motive. They would pay more tax by routing some of the disputed payments because they would be caught by South African CFC rules. If there is no reduction in tax to the group, the report makes no sense.

The question is where these profits actually arise – whether they arise in Ireland and Mauritius and who bears the tax cost. The argument raised in the report is that there is little tax paid in South Africa, but this in itself doesn’t suggest that this is not happening.

That’s the pivotal one for me because it is fundamental: what is the behaviour that the company have been encouraged to do? And is it related to tax? And if so is it intended by law, or acceptable, or not?

The point about sourcing is covered by ABF, I believe. They said they couldn’t source people cheaper elsewhere. So if the costs are genuine, which you don’t appear to contend, there isn’t a corporation tax angle, just an employment and resourcing one (the former finance minister would simply like them to source locally). Which is why I have an interest in the Irish company…

I genuinely haven’t decided either way on this story and I appreciate that you don’t have the full information. Whether it should be available is another discussion. But I just think that there’s still facts in dispute and those not disputed aren’t exactly scandalous, as Maya points out.

Personally, I can’t believe there are worse examples to pick out. But perhaps I have become cynical from all the negative media…

As Ben says what is at stake here (in the ABF case) is the risk that if
the communication on the Action Aid report has overeached its specific findings and concerns, then this damages both a business that has invested in Zambia and Action Aid’s reputation for robust research and good faith campaigning.

Frankly, what George Osborne or Ng’andu Magande have to say about the broader debate is neither here nor there.

I think the idea of some kind of pre-publication technical review and independent commentary for these reports can only reduce such risks, and improve the quality of public debate. Two key questions that those reviews should ask are

1) Is it made clear where accounting practices are non-controversial, and that their impact on the tax bill is not part of any tax dodging allegation?

2) Are any tax dodging allegations that are made clearly supported, with clarity about any assumptions made if there is inadequate information to come to a clear judgement?

Thank-you again,for patiently answering my questions on my blog and Martin’s. Just for avoidance of any doubt, the critical question on clarifying how Action Aid came to an estimate of $7.4m Corporate Income Tax forgone in relation to management and technical services contracted through ABF’s sister company in Ireland has not been answered ( The question is please clarify the assumptions underlying the estimate – i.e. what % of the $47.6 payment to Illovo Sugar Ireland is estimated/implied to be spurious?)

If we take ABF at face value (when they say contracting management services through Zambia Sugar directly was not feasible / desirable), it begs the question as to why they decided to do it through a mailbox company in Ireland. Why not do it via the Illovo HQ in South Africa, or the ABF HQ in the UK?

As we say in the report, the key motivation for this appears to be the fact that the Ireland – Zambia DTA prevents Zambia from levying any withholding tax on the transactions. The standard WHT rate in Zambia is 15%, which was raised in the last budget to 20% to fund development projects in the country. The withholding taxes Zambia loses on the management fees & the large loan routed through Ireland amount to some $10.4 m alone since 2007.

The main argument in the report is that Zambia is losing significant tax revenues as a result of the financial engineering of Zambia Sugar / ABF. This point is undeniably true, which is why I suspect policy makers have responded so positively to the research.

– the research was independently reviewed by a former HMRC transfer pricing expert on two separate occasions prior to publication.
– Bill Dodwell’s criticism of AA’s work on the tax haven subsidiaries of the FTSE 100 was first made very publically, at the PAC hearings & the Tax Journal article was simply a restatement of this. When I was contacted by the editor to put our side if the story, I felt it was important to defend our methodology.

That’s why I’m interested in the accounts of the Irish company, and probably the South African company too.

If there’s no tax saving in the group from the transactions, which is the most interesting argument to my mind, then it doesn’t make sense. That’s something they’ve said a couple of times if I recall correctly (on my phone right now).

One of my first thoughts about this was why would you bother with the risk of a court case over the rate of tax if you were aggressively extracting profits through low tax jurisdictions anyway? Double bagging it, perhaps, but it seems a bit of an unnecessary means of drawing attention with the tax authorities.

Mind you, businesses as a whole do very odd things as a result of individual parts acting independently. So it wouldn’t surprise me either way.

Ben – I your confusion may have caused by ABF’s response, which argues ‘there’s no advantage for us to shift profits into tax havens as we have a 10% CT rate in Zambia anyway’.

The company only gained a 10% tax rate in 2012 – and our study looks at the period 2007-12 (when ABF took a controlling stake). They fail to acknowldge that for the majority of the period there was a clear tax advantage for them. The Irish structure was in place as far back as 2001, when the Zambian CT rate was c.35%.

For me this begs an important question. Just as campaigners have a moral responsibility to get the analysis right, do you think companies have a responsibility to respond with a similar level of accuracy? They obviously have the right to mount a robust defence, but are partial (and I would argue misleading) statements ok?

For me, ABF’s statement in the FT that Irish services are booked at cost, when their accounts show an average profit margin of 26% over the period on the management fees is pretty troubling.

Whether it’s 10% or 15% isn’t really relevant. It’s less than the 28%, I think, that they are claiming would be taxed elsewhere. That’s the substance of the point to me, not the specific rate.

In your infographic you show 35% being reduced to 10% without a similar caveat. I originally saw the point made in your comments on the ABF response, which is why I thought it was a bit odd that you did something similar.

But that’s more about the nature of simplifying than the point you are making, which I do think is fair.

I think not being able to make a point well is different to being deliberately deceptive.

I give the example of Starbucks who I think have handled the tax avoidance claims quite badly. But that’s a completely different kettle of fish….

It has already been clarified that the allegation which is made in the report as the basis for the ‘Mystery Management’ figure is not about the fairly straightforward matter of witholding tax, but a much more serious allegation that ABF avoided $7.4m of corporate income tax.

The $10.4m figure for WHT losses is not made up of forgone WHT in relation to dividend payments, management fees and loan – it is just the dividend payments and loan ($7.4 ‘tax free takeaway’ + $3m ‘dog leg interest’).

When you say “the Ireland – Zambia DTA prevents Zambia from levying any withholding tax on the transactions”, given that Zambia signed that DTA, is this not equivalent to saying “Zambia is quite happy for there to be no withholding tax on the transactions”?

The suggestion is that the DTA has somehow been imposed on an unwilling Zambia. I see it was made in 1971, well after independence, although I suppose one might infer that a newly-independent country had little clout to bring to bear. On the other hand, it’s hard to see why Ireland should have been in a better position to force concessions out of Zambia than the UK.

I know renegotiating a treaty once in place takes time, so it’s not a simple matter for Zambia to reimpose WHT, but if it is a problem then presumably Zambia could now be seeking to do so. Do you know if she’s taking any steps in that direction?

ActionAid colleagues in Zambia are lobbying the government hard to renegotiate, and we understand that there is some willingness on the part of the Irish to do the same. I suspect that the DTA was signed with the intention of boosting FDI from Ireland to Zambia (as we show in the report, Ireland is a long term development partner, dedicating significant amounts of aid to the country), but in this case, it’s being used as a loophole to avoid WHT.

Interesting, thanks. My initial reaction is that if Zambia wanted the WHT rather than FDI, then the lobbying wouldn’t have to be all that hard… 🙂

I’m always interested in things being characterised as loopholes, especially where they’ve been specifically set up – I think I’d really prefer to find a different word for “a thing used in a way that wasn’t intended”, as to me “loophole” means “unintended gap”. Although of course in miltary terms a loophole is something you make deliberately, to see or shoot through, so there’s evidently been some change in usage.

In this case, ignoring etymological asides, I suppose my fundamental question would be: if I assume that the DTA could be used to eliminate WHT in some way that you wouldn’t describe as a loophole, how does ABF’s use of it differ from that legitimate usage?

I was wondering if there are any other countries that have the same arrangement with Zambia? I’m looking through the DTAs in my lunch hour but I’ve seen a dividend concession for the UK at 5% and that’s it so far.

EY’s corporate tax guide suggests that about half their treaties have 0% WHT for management fees, and perhaps half the dividends/royalties/interest across all the DTAs are at less than 15%.

But Ireland seems to be much the best, with 0% across the board: it’s the only country listed that gets nil on interest and royalties. The next best are India and Japan, with nil on fees and dividends but 10% on interest and royalties.

I don’t know how complete the list is, of course, although the equivalent page for the UK looks fairly comprehensive.